Dual Agency and the Escalation Issue

A broker recently called seeking an answer to what he thought was a dilemma created by an in-house transaction in which he was working with the seller and one of his sales agents with the buyer. Yes, that would be dual agency. Not only would this be dual agency, it would be dual agency without designated agency. (NOTE: This is not the focus of the article and I don’t want to go too deep, but a broker involved in an in-house transaction where a sales agent is working with the other party can never be a designated agent. The broker is duty-bound to supervise his or her sales agent, including the one representing the other party to the transaction. Both the broker and the sales agent are dual agents for purposes of this transaction.)

At the outset, the sales agent advised the buyer that there would likely be great interest in this recently listed property and that the buyer should expect competition. When the buyer asked what would strengthen her offer she was told things you would expect: good deposit, strong mortgage prequalification (or no mortgage contingency), high offer, limited contingencies and so on. The sales agent also explained that the offer could be made subject to an escalation contingency and the buyer opted to incorporate it in her offer.

Upon his receipt of the offer, the broker questioned whether he would be breaching his duty to the buyer (yes, as a dual agent he had duties to the buyer) by revealing the buyer’s willingness to pay more than that stated in the offer. He considered that the rigors of dual agency required that he and his agent walk a straight line down the middle. He also recognized that the buyer may have thought it advantageous to tip her hand that she would pay more as it may be what gets her the home.

The efficacy of using an escalation clause transcends dual agency. Even in a cooperative transaction, a buyer may wish to signal her ability to pay more. Regardless, our broker thought, that by submitting an offer subject to an escalation clause, he was putting the buyer at a disadvantage that breached his duties as an agent to both.

As he thought his way through this he contemplated having his agent who was working with the buyer rescind the buyer’s offer and then replace it with an offer sans the escalation clause. But, that struck him as a cover-up. You can’t rescind knowledge. There is no such thing as an agency lobotomy! His head filled with more questions than he could answer and after considering all of the competing duties he felt less certain than ever, hence his call.

It is easy at the outset of a dual agency relationship to tell the parties that because of the competing interests, you cannot advise seller or buyer about the “right” purchase price.

Buyer determines the offer and the seller accepts, rejects or counters in the amount that he or she deems best. But in reality, dual agency is extremely difficult to execute.

Back to our broker’s dilemma. A buyer who submits an escalation clause should understand that the seller will know that the buyer has the ability to pay the top number that could be achieved by following the escalation clause formula. The buyer should understand that the seller may counter at that upper limit even though the seller may have no other offer in hand. The seller should understand that countering at the high number may not necessarily move the buyer. It is all a matter of negotiation and the parties will do their tête-à-tête until a number is achieved.

As dual agents, the broker and his agent should educate both parties about the advantages and disadvantages of the escalation addendum. The seller and buyer should both be armed with the same information. The buyer should be told as she considers using an escalation clause, that the seller will be privy to a conversation much like the agent is having with the buyer and vice versa.

Usually the conflict created by a dual agency relationship can be dealt with by more information than less. Do you withhold a comparative market analysis (CMA) from the buyer because it will demonstrate that the seller is on the high side? My answer is that both the seller and buyer should be aware that CMAs will be used as they would in a cooperative transaction. The chips will fall where they will. It is generally when we hide information, even when done for what appears to be fairness that we run into problems.